As a certified credit counselor I spend the majority of my day helping people that have gotten in over their heads with credit cards. I am typically not a proponent of credit card use, however when used responsibly you can actually use credit cards to your advantage.
The credit-card game has changed dramatically over the past few years and in order to play, it helps to know the rules.
Take a few moments to evaluate what is in your wallet, particularly those credit cards. Are your cards working for you? Helping or hurting your credit?
Rules of the Game
There are several misconceptions many of us have about credit cards and how they work. In order to use credit cards to your benefit and put yourself on an even playing field with your credit card company, it is important to be credit card savvy and understand all of the rules.
Pay your credit card balance in full, or as much as you can.
Credit card companies have led us to believe that we should pay the minimum payment each month. After all, isn’t that what they put on our statements? Pay this much by your due date. In fact if you just pay the minimum you are kept current and your credit score stays untarnished. But, did you realize that minimum payment is typically only 4 % of your total balance? And to make matters worse, you are paying interest on the total balance owed. Depending on your credit card it could be at rates of 29% or more.
The CARD act shed some light on credit card companies’ tricky tactics. Today your bill is required to show how long it will take to pay back your balance by only making minimum payments. Unfortunately many people are so brainwashed into thinking they only have to pay the minimum they continue to do so. By only paying the minimums you are actually paying interest on interest because as you accumulate interest charges your balance begins to compound not only on what you owe but also on the interest.
Know that your credit limit is NOT how much you can afford.
It’s funny how we apply for, and get a new credit card, find out the credit limit is $5000 and think wow I can spend $5000. Somewhere along the line we were led to believe that available credit was just that, available for us to spend until we reach the limit.
The truth about your credit limit is that this is the amount your credit card company is willing to loan you based on your credit report. By maxing out your credit card you will not only put yourself in a bad financial position you also hurt your credit score by using all of your “available” credit.
Credit card interest rates are NOT always fixed.
The Card Act made credit card companies get creative with interest rates. Instead of fixed rates many credit card companies are now using variable rates—these can go up when other rates are on the rise.
Many consumers are also unaware of different rates for the different types of borrowing they may do. Such as cash advances. Cash advance rates are typically financed at a much higher rate than the standard purchase rate.
Most important to understand is that missed or late payments can and usually do cause your interest rate to sky rocket and stay there. Your once 15% interest rate card goes to 30%–Yikes!
Fees a credit cards best friend.
Credit card companies are famous for superfluous fees. You know the ones I am referring to:
- Late payment fee: $35
- Balance transfer fee: 5% of the transferred balance
- Cash advance fee: 5% of the amount withdrawn or a minimum of $5 or $10.
- Foreign transaction fee: 3% of the transaction
These fees are easily avoided if you plan ahead, make your payment on time, and use your debit card to retrieve cash.
Credit cards are a convenience for many of us. They offer purchase protection, make online transactions simple, and tracking spending a breeze, but at what price?
If you don’t know how to play the credit card game and forget about following the rules you may just find yourself in search of debt help. Credit card companies make it easy for consumers to get into debt and difficult for them to get out.
So, follow the rules of the game, most importantly pay your balance in full or at least as much as you can afford each and every month and make your credit cards work for you.
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